What is an Initial Coin Offering (ICO) and How Does It Work?

With the rise of blockchain technology, numerous digital coins have emerged in the cryptocurrency market. This has been made possible by financial instruments such as Initial Coin Offerings (ICOs). Through ICOs, startups can swiftly generate tokens and raise funds for their ongoing development. Investors can acquire tokens at a minimal cost at the project’s outset, with the hope of profiting in the future as the startup grows and the coin’s value increases. Let’s explore what an ICO entails, how this technology operates, and how investors can avoid investing in a project that may result in losses.

ICO Overview

ICO, or Initial Coin Offering, is a term used in the financial market to describe the initial offering of a digital currency. In simpler terms, it’s a form of crowdfunding in which participants pool their resources to fund a business with the expectation of receiving future returns.

There is a related concept to ICO, which is IPO. In an IPO, investors buy shares of a company rather than altcoins. The main difference is that in an ICO, investors of a startup or project won’t have the ability to influence the company’s operations or make management decisions. However, in an IPO, investors become shareholders and have a say in the company.

The primary condition of the ICO is the requirement to pay dividends, which could be:

• Part of the tokens the company must redeem at a price higher than the day of the ICO.
• The issuer’s services are sold for tokens at a more favorable price.
• Bonuses and special offers are available for investors.

An ICO can be likened to an interest-free loan that a startup takes out for development.

How ICO Works: Goals and Objectives

The principle of an ICO is simple: the company issues its own token and offers to buy it with other cryptocurrencies or fiat money. In this way, it provides itself with funding for the start and further development. ICOs allow businesses to launch quickly and enter the monetization stage.

Stages of the ICO

Issuance of digital money takes place in several stages:

1. Preparation for ICO. A project with promising potential can raise funds through an Initial Coin Offering (ICO). To achieve this, it is crucial to persuade investors about the startup’s prospects, showcase its advantages, and instill confidence. Making a detailed white paper (business plan, project concept) publicly available will be beneficial. The more information and research we have about the project and its team, the better. The presence of publications in specialized expert communities and financial statements are indicators that the project is at least deserving of attention and, at most, trustworthy.
2. Launching ICO. To launch the initial coin offering (ICO), information about the project is published on unique platforms such as ICO Alert and Smith&Crown. A date is set for the procedure, and it is promoted to garner interest. Interested parties can learn about the project’s ideas, key figures, and the entire community in detail. The presence of a community, reputable investors, and a strong team are all positive indicators of the project’s prospects.
3. Pre-ICO. A pre-ICO is an initial closed sale of tokens at a lower cost. Not all companies conduct pre-ICOs, and the funds received are often invested in the beta version of the product.
4. Post-ICO. Final placement of tokens. At this stage, the company must fulfill all the promises it has made to investors. The startup is actively engaged in marketing and continuously develops the product. Post-ICO usually takes the most time, as, during this period, the company must ensure the value of tokens for holders and list the coins on popular decentralized crypto exchanges.

Legal Aspects and Risks of Participating in an ICO

In some countries, the use of digital currency is not regulated by law, and there are no regulations for Initial Coin Offerings (ICOs). Consequently, investments in decentralized finance often lack documentation and do not impose any obligations on the company.

In this arrangement, there are no contracts, receipts, or pledges involved. The investor provides funding to the company based on trust and in the anticipation that the startup will progress. If the startup becomes successful, the risks taken are validated, and the investor reaps a profit. However, if the startup is not successful, the funds will not be refunded. As a result, investors bear all the associated risks when making investments.

There are various issues to be aware of when investing in projects. Some founders may be scammers who present a business plan in a positive light and talk about its advantages, but the project turns out to be a scam and is shut down immediately after raising funds. Other scammers may not openly deceive investors but change their obligations over time, making the project less attractive than initially promised. To protect yourself from these risks and choose a profitable project, please reach out to our experts. They will provide advice and assistance in making informed decisions.

Important considerations before investing in ICO:

• White Paper, detailed business plan, and other project documentation.
• Please make sure that all necessary agreements, including a public offer, are available on the company’s website.
• Working prototypes of the product, beta version.
• Registration of the company and its reputation both online and offline.
• A list of exchanges that intend to list the token.

Authoritative platforms like Protocol Labs and AngelList gather information about ICO projects on their websites, allowing investors to research the companies planning to issue tokens. These platforms also feature lists of questionable projects. Additionally, there is a wealth of helpful information available on specialized forums.

Investments in ICO

You can invest small amounts in ICOs. Often, the cost of one token does not exceed several cents. For novice investors, this is an opportunity to reduce risks by spending a small amount to see how ICO investments work in practice.

You have the option to invest in a new or established project that has chosen to release its own token on specific platforms such as ICO Alert or Smith & Crown. Startups seeking financial investments are listed on these platforms every day. The process is similar to exchanging currency on an exchange or at a currency exchange office—an investor purchases a new token using a well-known token like Litecoin or fiat money.

A new large-scale ICO is taking place on the Ethereum platform, and investments are being collected in ETH. This means that users will need to purchase this token in advance. Once the ICO starts, the Ethereum wallet address for transferring funds will be provided. In order to receive tokens, the investor will also need to select a multi-currency wallet to hold the coins, such as Parity, Exodus, or MoneeBot.

Before transferring coins, we recommend that you familiarize yourself with analysts’ forecasts regarding the future of new tokens. This information can be found on various websites:

• ICOSTATS provides data on the post-ICO price dynamics of various tokens.
• ICO Rating is a platform featuring ICO projects that can be assessed based on various parameters, where companies can promote their ICOs.
• ICO Calendar is a tool that serves as a reminder for investors, indicating when a project has started fundraising.

Examples of Successful ICOs

During the ICO, a project can raise a significant amount of money. According to analytical data, a successful large project will start at $8–10 million, and that is not the limit. The people behind the new idea play an important role. If the project has a well-known creator, the raised amount may be much higher.

Here are a few examples of successful ICOs:

• Ethereum (ETH). When the ICO took place, Ethereum and its blockchain sparked excitement among crypto enthusiasts. The project raised $18.4 million in 42 days, and the token became the second-largest coin.
• Cardano (ADA). Cardano has enhanced its collaboration with Ethereum, leading to a highly successful ICO that raised $62.2 million. This achievement enabled the company to break into the top five largest cryptocurrencies by market capitalization.
• Block.one (EOS). The token public offering lasted about a year and raised $4.1 billion. 
• Polkadot (DOT). The ICO raised $145 million for the project. The Polkadot protocol and its DOT token ensure uninterrupted data transfer and communication between independent smart contracts.
• NEO. The Chinese company conducted a large-scale ICO with assistance from the Chinese government and Microsoft Corp. Investors made significant profits on their investments. The initial token price ranged from $0.03 to a maximum of $180.

Similar to other crowdfunding projects, an Initial Coin Offering (ICO) entails funding all the expenses of a startup. The funds can be withdrawn in countries where cryptocurrency is permitted, such as Luxembourg, Singapore, etc. If you intend to select an offshore jurisdiction for launching a crypto project, please get in touch with our specialists immediately via online chat or by phone.

Our experts are knowledgeable about the benefits of cryptocurrency-friendly countries. They can assist you in selecting a jurisdiction with favorable taxation and special economic zones for crypto projects, which can provide significant advantages for a startup.

Legal transparency provides added assurance for investors, and a country that embraces innovation is crucial for creating a stable and favorable environment for projects. At Q Wealth, we can assist you in registering a legal entity for your crypto startup, opening a bank account, and choosing a taxation system. With our services, your business is guaranteed to have a successful start!